Cash-rich AuRico to buy back shares

AuRico Gold (AUQ-T, AUQ-N) is flush with US$750 million in cash after selling Minera Frisco (MSNFY-O) its Ocampo mine and adjacent exploration projects, Venus and Los Jarros, in Mexico’s Chihuahua state, as well as its 50% interest in Orion, an advanced exploration project in Nayarit state. And so, AuRico has decided to pay off US$128 million in outstanding debt and buy back up to US$300 million of its own shares. 

AuRico shareholders can tender shares at prices in 5¢ increments between US$8.30 and US$9.30 apiece. Rahul Paul of Canaccord Genuity reasons that the share buyback program “could be substantially accretive to our per-share earnings, cash flow and other financial estimates going forward.”

If the maximum number of shares are tendered (32.3 million at US$9.30 per share, or 36.1 million at US$8.30 per share), Paul estimates that accretion to estimated earnings per share and cash flow per share in 2014 would be in the order of 12.8% to 14.6%.

Paul has a “buy” rating on the stock and a price target of US$11 per share. In Toronto AuRico’s shares traded at $7.92 within a 52-week range of $5.20 to $10.24. In New York, they traded at US$8.04 within a 52-week range of US$5.25 to $10.36.

Paul writes in a research note that AuRico might announce a dividend policy when it reports its year-end results, and that “continued successful operation execution, particularly on the Young-Davidson ramp-up, could potentially drive further rerating.” The company declared commercial production at the Young-Davidson gold mine in northern Ontario on Sept. 1.

“AuRico is acquiring shares of a potential dividend-paying gold producer with an attractive organic growth profile; low cost and long life assets; low development, permitting and cost-escalation risk; a solid balance sheet; and low political risk,” Paul argues. “In our view, such an investment would typically involve a substantial premium valuation.”

David Haughton of BMO Capital Markets resumed coverage of the company following the Ocampo sale, but has done so with a rating downgrade from “outperform” to “market perform.” He has also raised his target price to $9.50 per share, noting that paying off debt and buying back shares derisks AuRico, while boosting the importance of ramping-up Young-Davidson.

He says that the share buyback would be dilutive to net present value by 1% to 5% over the proposed share price range using a 10% rate at spot and BMO prices, while he forecasts the share buyback being positive to earnings per share by 12% to 14% in 2013, using spot and BMO prices.

The share offer closes on Jan. 23.

AuRico strengthened its balance sheet in October when it sold its equity stakes in Endeavour Silver (EDR-T, EXK-N) and Crocodile Gold (CRK-T) on a block-trade basis, for gross proceeds of $104.6 million.

Young-Davidson is located near the town of Matachewan, on the site of two past-producing mines that churned out 1 million oz. gold from 1930 to 1960. In the three months leading to Sept. 30, the mine produced 9,903 oz. gold at a total cash cost of US$639 per oz. gold.

Current production comes from an open-pit mine forecast to produce 65,000 to 75,000 oz. gold in 2012 and 135,000 to 155,000 oz. in 2013. The mine is expected to ramp-up to over 250,000 oz. annual peak production by 2016. 

Young-Davidson is 60 km west of Kirkland Lake in the southwestern part of the Abitibi greenstone belt. Drill results demonstrate potential for mineralization to be found west of the mine, the company says, where it has five diamond drills exploring a number of targets.

As of Nov. 6, 2012, AuRico had completed nearly 29,000 metres of drilling in the year that focused on two areas: the YD West zone, west of the main zone below the 9,500-metre level; and the West Shirriff area, which is west of YD West. The company discovered the YD West zone in 2010 and has defined it to the west and at depth. It remains open in both directions. Results from the West Shirriff zone have shown anomalous gold of the same rock and alteration type as the main zones of the mine, management says.

AuRico also owns the El Chanate mine in Mexico’s Sonora state. Acquired in April 2011, El Chanate is located 37 km northeast of Caborca. Historical workings suggest the area has been mined for gold since the early nineteenth century. The current open-pit mine has been developed below the level of the historical small-scale mine workings.

In the three months ended Sept. 30, El Chanate produced 19,388 oz. gold at a total cash cost of US$434 per oz. gold. The open-pit mine plan covers an area that is 1.7 km in length, 780 metres in width and 280 metres in depth. El Chanate uses conventional three-stage crushing and heap leaching, with gold-bearing solutions processed in an ADR plant, followed by electrowinning and refining.